Drax Shares Tumble on U.K. Court Ruling Against Subsidy Contract

Aug 07, 2014 6:41 am ET

Aug. 7 (Bloomberg) -- Drax Group Plc fell the most in 3 1/2 months after the U.K. Court of Appeal ruled one of its power- generating units isn’t eligible for a government contract that pays guaranteed electricity prices for 15 years.

The decision leaves Drax reliant on an older subsidy system called the Renewables Obligation to fund the conversion of one of its six units from burning coal to biomass. That older program has less price certainty than the newer one, known as a contract-for-difference, which Drax had sought.

“Drax will now consider its options for the full conversion of this unit, where eligibility for support under the Renewables Obligation has been confirmed,” the company said today in a Regulatory News Service statement. Drax won’t appeal the decision, it said.

The shares today plunged as much as 12 percent, the most since April 23, the day the government said only one of two conversion projects by Drax was eligible for the contracts. Last year, it had shortlisted both. The stock was down 77.5 pence at 632.5 pence at 11:39 a.m. in London.

Drax in April was awarded one of eight renewable energy contracts that would guarantee it a power price of 105 pounds ($611) per megawatt-hour of electricity it produces from a unit converted from burning coal to biomass. It had expected two such contracts after both were shortlisted last year. The deals were precursors to the contracts-for-difference program, which has its first auctions in October.

Today’s Decision

A High Court judge in July agreed with Drax that the government’s decision had to be quashed. The Department of Energy and Climate Change told Drax that it had appealed the ruling. Today, the Court of Appeal ruled in DECC’s favor and dismissed Drax’s application for judicial review.

“We believe that we ran a fair and robust process and are pleased that the Court of Appeal has upheld decisions we took,” DECC said today in an e-mailed statement. “We will now work with Drax to find the best outcome” for the unit.

Aside from using the Renewables Obligation, another option for Drax would be to bid in future auctions for contracts. Still, the government last month said it won’t fund any biomass conversion projects when it awards another 200 million pounds ($340 million) of contracts at the first sale in October.

The case is Drax Power Ltd. v. Secretary of State for Energy and Climate Change, case no. 14-2396, U.K. High Court of Justice, Queen’s Bench Division.

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--With assistance from Nadine Skoczylas in Jerusalem.